In recent months, Western commentary has once again seized upon China’s trade surplus as evidence that the renminbi (RMB) is undervalued. The familiar charge is that China keeps its currency artificially weak to support exports. This narrative, rooted in older economic frameworks, places heavy weight on trade flows while giving insufficient attention to the realities of modern global finance. As debate intensifies, it is worth asking whether this interpretation still captures the forces shaping today’s exchange rates.

The more relevant question is not whether the RMB is “too weak” or “too strong”, but whether the tools used to judge its value remain fit for purpose. Exchange rates are shaped by a complex interaction of trade, capital flows, financial markets, expectations, and structural change. Estimating an equilibrium level is inherently uncertain, and conclusions depend heavily on the analytical lens applied. When viewed through frameworks that incorporate financial cycles and global capital mobility, the claim that China’s trade surplus reflects an undervalued currency becomes far less persuasive.

The limits of the traditional exchange-rate view

For decades, currency valuation has been assessed using neoclassical models such as purchasing-power parity (PPP) and the Balassa-Samuelson hypothesis. These approaches emphasise real-economy fundamentals-relative prices, productivity differentials, and current-account balances. Within this framework, persistent trade surpluses should lead to currency appreciation; when that adjustment fails to materialise, official intervention is typically assumed to be the culprit.

Though intuitively appealing, this view sits uneasily with the structure of today’s global economy. Foreign-exchange markets now operate on a scale unimaginable when these models were devised. Daily global FX turnover reached roughly $7.5trn in 2022, many times the value of annual world trade. In such conditions, capital flows, portfolio reallocations, interest-rate differentials, and shifts in investor sentiment routinely outweigh trade flows in driving exchange-rate movements.

Traditional models also struggle to account for empirical anomalies. The United States has run trade deficits for more than half a century, yet the dollar has not suffered the sustained depreciation that current-account-centred theories would predict. Conversely, surplus economies have at times experienced currency weakness, underscoring that trade balances alone are neither necessary nor sufficient to determine exchange-rate outcomes.

China’s recent experience further complicates the standard narrative. Its manufacturing sector has continued to move up the value chain, productivity has improved, and global competitiveness has strengthened. Yet since 2022, China’s real effective exchange rate (REER) has depreciated-contrary to the Balassa-Samuelson prediction that rising productivity should lead to real appreciation.

A financial-cycle explanation

A more coherent account emerges from a financial-cycle perspective. This framework recognises that capital flows and expectations-rather than trade fundamentals alone-shape currency movements over both short and long horizons. Exchange rates in a financialised world are not simply prices that equilibrate trade flows, but outcomes of global financial conditions.

China is currently navigating the downswing of a financial cycle following years of rapid credit expansion and rising asset prices. A cooling property sector, deleveraging pressures, and subdued domestic demand have dampened inflationary forces. In such phases, currencies often weaken regardless of productivity performance, as financial headwinds dominate exchange-rate dynamics.

Between early 2022 and late 2025, the RMB’s REER fell by roughly 16%. Much of this adjustment reflects shifts in global asset allocation, risk appetite, and interest-rate differentials-particularly the strength of the dollar amid the Federal Reserve’s tightening cycle. The RMB’s trajectory is therefore consistent with global financial conditions rather than evidence of an engineered export strategy.

Nor does China’s exchange-rate regime resemble one geared towards competitive devaluation. Authorities have repeatedly intervened to smooth volatility and lean against excessive depreciation pressures. The policy priority has been stability, not advantage.

The trade surplus itself is better understood through structural forces: rising global demand for higher-value Chinese exports, dense supply-chain ecosystems, and domestic economic adjustment. During financial-cycle downturns, imports often soften as domestic demand weakens, widening trade surpluses independently of currency movements. A weaker currency and a larger surplus are not inherently contradictory.

Updating the RMB debate

Much of the confusion surrounding the RMB reflects an analytical mismatch: applying goods-centric models to a financialised global economy. While neoclassical frameworks retain historical relevance, they were developed in an era of limited capital mobility, before financial cycles emerged as dominant macroeconomic forces.

Today, capital flows can diverge persistently from trade flows; exchange rates need not converge to theoretical equilibria; and currencies respond to monetary-policy divergence, geopolitical risk, investor psychology, and liquidity conditions. Ignoring these forces risks drawing incomplete or misleading conclusions.

The global dominance of the dollar further complicates matters. American monetary policy effectively sets global liquidity conditions. Periods of high US interest rates draw capital towards dollar assets, strengthening the dollar and exerting downward pressure on other currencies regardless of their trade balances. This dynamic has played a central role in recent RMB movements.

As signs emerge that China’s domestic financial adjustment is stabilising, incentives to hold RMB-denominated assets are beginning to recover. Episodes of recent currency strength sit uneasily with claims that the RMB is structurally or deliberately undervalued.

Towards a more grounded conversation

The debate over China’s currency would benefit from updated analytical tools and greater conceptual clarity. A balanced reading suggests that:

• Trade surpluses alone do not determine exchange-rate valuation.
• Financial cycles and capital flows exert a powerful, persistent influence.
• China’s exchange-rate management prioritises stability over competitive gain.
• The RMB’s recent path reflects global financial conditions, not manipulation.

As the global economy becomes ever more interconnected, reliance on outdated models is likely to generate further misjudgments. A more nuanced approach-one that integrates trade, finance, expectations, and structural change-offers a clearer view of the RMB and its role in the global monetary system.

About the Author: The author is associated with the Global Strategic Institute for Sustainable Development – GSISD and can be reached at waniatahir23@gmail.com